DANIEL MCCONNELL: Public service pay deal: Peace may be achieved but at a high price

Economists such as John Fitzgerald have correctly questioned the merit of returning to pre-crash pay levels in the first place, the political system here seems intent on capitulation on that point, writes Daniel McConnell.

THE unsustainable spending increase of today is the savage, socially destructive spending cut of tomorrow.

This was the warning from Paschal Donohoe, the Public Expenditure Minister in his Budget speech of last October — he said he would not tolerate bonanza giveaway pay increases in the public sector.

Now that his long-awaited new pay deal has been published in draft form this week, has Mr Donohoe managed to live up to his own standards?

Well, the first point to make is that the Lansdowne Road Agreement 2, as it is being dubbed, is a high-cost deal. At €887m, it is the latest in a series of high-cost deals laboured on the taxpayer in order to secure industrial peace.

Since the late Brian Lenihan killed off what was then the scandal of social partnership in December 2009, on the eve of his savage austerity budget, a succession of pay deals have been negotiated between the governments of the day and the all-too-powerful trade unions.

At the apex of the financial crisis, and behind Mr Lenihan’s back, then taoiseach Brian Cowen negotiated the first Croke Park deal amid high controversy.

Brian Lenihan and Brian Cowen
Brian Lenihan and Brian Cowen

While pay was cut and the pension levy was introduced, it guaranteed public servants their jobs and their pensions when more than 250,000 private sector jobs disappeared.

It was highly divisive and such divisions and resentment continue to this day.

Speaking in Hell at the Gates, a book I co-wrote with journalist John Lee, Mr Cowen made it clear that he felt that, such was the flux engulfing the country, establishing some stability through Croke Park was needed.

Mr Lenihan was furious and reluctantly went along, knowing that the deal tied his hands hugely as to where cuts needed to be made.

Such resentment of the deal spiked when it emerged in 2013 that incremental pay increases to public sector workers, worth almost €1bn, continued to be paid all the way through the crisis, even to those on six-figure salaries. The inequality was outrageous and was disgracefully compounded by Brendan Howlin when in Government.

He negotiated the doomed second Croke Park deal, Haddington Road and then the Lansdowne Road Agreement and part of that was establishing a lower entry point of salary for new entrants.

It was a shameful penalising of new entrants to protect fat cats at the top, who can look forward to retiring on gold-plated highly generous pensions.

Belatedly, Mr Howlin did set out his stall about restoring the pay of those cut during the crash and that process began in the reckless giveaway budget in October 2015.

Not that it did either Fine Gael or Labour any good.

Mr Donohoe, since succeeding Mr Howlin as public expenditure minister, has continued on in that vein of seeking to restore pay, already doing a €40m deal with gardaí before Christmas, agreed by the Labour Court.

This new deal will see about 250,000 State employees receive pay improvements of between 6.2% and 7.4% at a cost of €887m over three years.

A further 50,000 civil and public service staff recruited since 2013 and who have a less generous pension scheme will receive pay improvements of 7% and 10% over the three-year period.

Around 23,000 State employees such as gardaí, military personnel and prison officers, who have faster- accruing pensions than other groups, will benefit least from the proposed new agreement.

From January 1, 2018, public service staff will receive a 1% pay rise with a further 1% increase to follow on October 1 next year.

Staff earning up to €30,000 will receive a 1% rise in January 2019 with all staff to get a 1.75% increase in September 2019.

Then, in January 2020, another rise of 0.5% will be put in place for those on salaries of up to €32,000 with another 2% being added in October 2020.

“We are talking about wage growth which is bang in line with what is happening in the economy, unlike before the crisis where the public sector led the private sector. Now they are working in tandem,” one senior Government figure told me.

Public service pay deal: Peace may be achieved but at a high price

While the above terms are the carrot, Mr Donohoe has added a large and heavy stick element to the deal by the way of higher pension contributions.

The existing public service pension levy, which was introduced as a financial emergency measure in 2009, following the economic crash, is to be converted into permanent additional superannuation contributions on a three-tier basis which is aimed at reflecting differing pension benefits.

For staff hired before 2013, the rate of the new contribution will be the same as the pension levy at between 10% and 10.5% depending on salary levels.

According to those around him, Mr Donohoe is hoping that the higher pension contribution will offset much of the impact of the cost of the pay deal.

According to sources, major effort was put in by Mr Donohoe and his officials in recent months to secure that higher pension contribution which will apply to all pensions above €34,000. That is a significant element and if accepted by unions represents a big win for Mr Donohoe.

Mr Donohoe is also arguing that the pay awards are in the medium range of what is being paid in the private sector and are not extravagant.

In the context of a public pay bill of €16.474bn in 2017, up 5.5% on the year before, the additional €887m is on the high side and reflects the fear within the political system to contain pay demands from public sector unions.

In truth, this is a politically pragmatic deal aimed at keeping the show on the road.

Yes, there has been the usual shape throwing from unions threatening to object but there is plenty of grease here to slide this thing through.

The great weakness, from his opponents point of view, in it was the failure to prioritise dealing with the lower pay for post-2013 entrants.

The likes of Sinn Féin and those on the hard left have beaten that drum hard.

Surely a deal which omitted the top tier of earners was possible and would have gone a long way to pay for parity, they say.

They find it hard to see how it is fair to see those earning over €100,000 getting a pay increase while those at the bottom remain behind their colleagues.

Yet Mr Donohoe has introduced a triple-lock mechanism to deal with those new entrants.

Firstly, they will pay a much lower pension contribution than their colleagues (3.3% as opposed to 10%). Secondly, they are entitled to see pay increases of up to 10%, which is more than the average pay increase of 7%.

FINALLY, there is a review mechanism in the deal which means that if after 12 months they are left behind, they can be dealt with.

Ultimately, the purpose of the deal was to secure industrial peace and while the shape throwing will continue from the unions, it is likely that peace will be achieved.

But, while Mr Donohoe has satisfied himself as to the value for money merits of his first major pay deal, the cost to the taxpayer is considerable.

Economists such as John Fitzgerald have correctly questioned the merit of returning to pre-crash pay levels in the first place, the political system here seems intent on capitulation on that point.

Also, virtually every study of pay differences between public and private sector pay rates have shown that state workers have enjoyed a premium over their counterparts and such gaps continued throughout the crash.

No deal is ever perfect and Mr Donohoe feels the €887m cost of industrial peace is worth it.

Let’s hope he is right and he is not like Icarus flying too close to the sun and he is not forced to once again engage in the socially destructive spending cut he spoke of above.

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